UTMA Theft by Custodian

[guardian141]

What is the name of your state (only U.S. law)? Florida.
I am my father's guardian.
My father's trust issued annual gifts to his great grandchild with the stipulation that the funds be placed in a 529 or UTMA/UGMA account. The father of this 2 yr old child, my father's grandson, placed the funds in an UTMA account for the child. He named himself as custodian.

I have since discovered that the father of this child has withdrawn 24K from this child's UTMA account for his own personal use and not for the benefit of the child. I requested that he either return the funds to the account or provide receipted proof that the funds were used for the direct benefit of the child. He has refused to do either.

Is there some way to prosecute the father (a previously convicted felon, currently on probation) for the theft of these funds and/or have the IRS pursue him for fraudulent use of the UTMA funds? What Florida statues and IRS tax code actually govern the proper use of these funds? What Florida law enforcement body would I approach to have the greatest chance of prosecution?

It is very sad that this parent would steal his own infant child's future shot at higher education.

 

[anteater]

It is very sad that this parent would steal his own infant child's future shot at higher education.

You have that right.

The IRS is not going to care as long as taxes were paid on any earnings within the account. You can try local law enforcement or the DA, but I would not be hopeful that they would pursue it.

Since you are father's guardian, there must be an attorney involved with the guardianship who is likely familiar with family law issues. See if you can get some quick advice. If not, try attorneys with experience in probate or family law. They are the ones most likely to be familiar with UTMA issues.

What about the mother of the child? The issue that has to be clarified is who would be considered an interested party who can act on behalf of the child.

If you want to look at the FL statute, it is at:
http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=Ch0710/titl0710.htm

 

[guardian141]

The mother of the child has no means to hire an attorney to sue for the return of the funds. The statue is so vague as to fiduciary duties of the custodian other than the custodian may not co-mingle the UTMA funds with his own and that the funds expenditure must be for the direct benefit of the child. The couple is not married and the father is currently not residing in the same home. The father provides no support for the child and the mother has no clue how to pursue child support. My attorney sees this as the mother's battle and not the estate's since the gift has already been made. I see this as theft of my father's gift and the funds were never intended to be given to the child's father as a 24K gift.

As, guardian I permitted the gifting to my father's great grandchildren to give them all a savings base for a college education. The father of the child, in withdrawing these funds, gives the appearance that the UTMA was always just a funnel for him to use the funds for himself and violates the intent of the UTMA. If the UTMA is then construed as a "gift" from the child to the father, wouldn't that exceed the annual gift allowance by about $12000.? Who would be liable for the gift taxes on that? or undeclared income. I fail to see how UTMA funds could even be permitted to be gifted to a custodian by a child that has no cognizance of what is happening to its money. Also, I doubt the father would even declare this $24K income on his tax return. Wouldn't the IRS see that gift as fraudulent as this comes from a 2 yr old child to a parent as a self serving gift? If this were an actual loophole, then many custodians of UTMAs would take advantage of this to take funds from their kid's accounts. This has got to be considered criminal in some fashion?

 

[anteater]

You are quite correct. A child really does not have the capacity to make a gift.

Given that we are talking theoretically regarding the gift, a gift is not considered income to the recipient.

By all means, call the IRS and local law enforcement. I am only cautioning you that both may (I would say likely) consider the custodian raiding the UTMA account to be a civil matter to be pursued by an interested party on behalf of the child.

Given what has happened you may want to re-consider how these gifts are made. While how a child's assets will be viewed for financial aid purposes in the future is speculative, right now the assets in an UTMA would be considered the child's assets, potentially decreasing the eligibility for financial aid. Even disregarding that, perhaps it would be better if the UTMA were set up with you as custodian.

As for 529's, you could probably create the accounts and be the owner, keeping the parents out of it completely.